PracticeAuditFSA defends its role over Lehman accounting

FSA defends its role over Lehman accounting

Watchdog chief says accounting gimmick only occurred in US consolidated accounts

The head of the Financial Services Authority has defended the role of the
watchdog in dealing with the collapse of Lehman Brothers and its accounting by
saying to blame the FSA was to misunderstand the issue.

Chief executive Hector Sants is quoted in the Financial Times today
saying: “Any suggestion that this is an FSA supervisory failure reflects a
complete misunderstanding of the circumstances.”

His comments follow publication of a report last week by the US bankruptcy
examiner for Lehman which said the investment bank used accounting for so-called
Repo 105 transactions to obscure the true state of its balance sheet.

He is reported to have added: “The balance sheet effect referred to in the
Lehman report only occurred in the consolidated accounts which were prepared
under US GAAP.”

Repo transaction involve the short-term sale of assets to raise cash but the
assets remain on the balance sheet of the seller because the intention is always
to buy them back. The deals are very common but Lehman exploited a technicality
in US accounting rules so the transactions could temporarily remove risky assets
from its balance sheet. Up to $50bn of these Repo 105 transactions were
channeled through London.

The examiner’s report heavily criticised US auditors Ernst & Young but
earlier this week the UK firm was asked to provide information to accounting
watchdog the Financial Reporting Council about its work on auditing the bank.

Read more:

Lehman
smoking gun leaves E&Y facing questions

Lehman
administrators consider damning report

Ernst
& Young “negligent” in Lehman audit, report claims

Lehman
CFOs were warned of risk

Related Articles

The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

Audit The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

5d Carl Johnson, Stephensons
BDO holds off Big Four to retain top position as AIM auditor

Audit BDO holds off Big Four to retain top position as AIM auditor

5d Alia Shoaib, Reporter
FRC urged to fine Big Four firms penalties over £10m

Audit FRC urged to fine Big Four firms penalties over £10m

2w Alia Shoaib, Reporter
EY to audit Standard Chartered bank

Audit EY to audit Standard Chartered bank

1m Alia Shoaib, Reporter
KPMG replaces PwC as Croda auditor

Accounting Firms KPMG replaces PwC as Croda auditor

2m Emma Smith, Managing Editor
EY fined £1.8m over Tech Data audit

Accounting Standards EY fined £1.8m over Tech Data audit

2m Emma Smith, Managing Editor
Top 50+50: Firms post significant growth in new tax and audit rankings

Audit Top 50+50: Firms post significant growth in new tax and audit rankings

2m Emma Smith, Managing Editor
FRC closes investigation into PwC over Barclays compliance

Accounting Firms FRC closes investigation into PwC over Barclays compliance

2m Alia Shoaib, Reporter